The Fama French model

There are offshoots from the APT that have sought to explain historical returns by company-specific factors rather than the general macroeconomic factors in the APT. For example, Eugene Fama and Kenneth French (1995) have isolated three factors: market return (as in the CAPM model), price/book value (see Chapter 32), and the gap in returns between large caps and small caps (which lends credence to the notion of a liquidity effect).

Other factors can be added to this list, including P/E, market capitalisation, yield and even past performance (which is a direct contradiction of efficient market theory). However, these are based on purely empirical approaches, not theoretical ones. While they criticise the CAPM model, they offer no better alternative model.